Blockchain technology is widely associated with the exchange of digital assets, from payment systems such as Zcash (ZEC) and Libra to platforms such as Ethereum and Substrate, using what are known as fungible tokens. An item that is fungible is interchangeable with an identical item. Your one dollar bill and my one dollar bill, your Bitcoin (BTC) and my Bitcoin, are worth the same amount.
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However, non-expendable tokens (NFT) are not worth the same as any other token or currency, even one that may appear similar. While this feature may seem impractical, especially given the commercial utility of tokens, it is a highly desirable feature if the objective is to protect the value of an asset. For this reason, non-fungible tokens have been revolutionizing the ownership of tokenized art and intellectual property.
The history of fungible and non-expendable tokens
To fully understand the difference between fungible and non-fungible tokens, and the role each type of token plays in the blockchain ecosystem, you must first understand fungibility and non-fungibility.
Expendable tokens are by far the most popular tokens in blockchain today, think Bitcoin or Litecoin (LTC). While these tokens often have to adjust to price fluctuations, they can often be exchanged for other fungible tokens at the same price at which they were purchased. This not only makes consumable tokens more convenient to trade, but also allows for the high levels of liquidity enjoyed in the crypto-currency markets.
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Non-fungible tokens are a completely different animal. Although they can be bought and sold using consumable tokens, they are their own asset class, the identifying information is embedded in their smart contracts, which is what makes each non-expendable token completely unique. This uniqueness makes non-expendable tokens unsuitable for most stereotypical crypto-commerce purposes, but they are ideal for recording and storing ownership of digital items such as collectibles, games, and even art.
Digital representation of real objects
While NFTs are digital assets, there have been interesting moves to link them to real-world physical objects. Unisocks, for example, allows you to buy a SOCKS (fungible) token that you can then exchange for a pair of real socks and an NFT that represents ownership of that pair of socks. Saint Fame has a similar configuration with its FAME and ICK tokens, which you can exchange for a physical shirt and mask, respectively. Twelve real-world prints of the CryptoPunks characters were made and placed in a Zurich art gallery, in sealed envelopes, with a paper wallet on the back.
If all this seems hollow to you, consider that traditional auction houses such as Sotheby’s and Christie’s, which control up to 80% of the secondary art market, have started to investigate blockchain-based solutions. Sotheby’s has said that it plans to take advantage of blockchain technology to preserve ownership of the artwork, although this is the least optimistic thing about cryptomonies, saying there are no plans to accept it. In 2018, Christie’s used the blockchain registrar Crypto Genius, founded by a former Sotheby’s employee, to conduct and record the sale of a private art collection, which was sold for $323 million.
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The interesting thing is that blockchain-based art could eliminate the need for these corporations. Since the origin and ownership history can be verified publicly in the chain, only someone who holds the private keys can transfer the art. Also, like many of these projects, a digital and real-world solution will have to coexist for some time.
What NFT has most successfully accomplished is to demonstrate the range of things that can be tokenized – a picture, a sound, a fraction of a video or even a game piece can be turned into a NFT, opening the door for intellectual property to be revolutionized in this burgeoning digital age.
Existing models around the creation, ownership and resale of art rarely benefit the artist. Imagine q